Puts and Calls: The government’s post-bailout fiduciary duty

Fiduciary duty: A Senate Judiciary Committee panel reportedly will hold hearings suggesting that investment firms and broker-dealers should have a fiduciary duty in their interactions with clients — meaning that companies would have to look out for clients’ “best interests.” Under present law, such companies only have to determine whether particular investments are “suitable” for the buyer. The extent and details of such duties are unclear to many in Congress. Most of the fireworks at the 11-hour Senate grilling of Goldman last week revolved around senators’ disbelief that Goldman could sell an investment while taking a counter-position in the firm’s own investments. The irony is thick, then, as the Wall Street Journal reported Tuesday that some members of Congress used their own money to make risky bets that U.S. stocks or bonds would fall during the financial crisis.

Defining the government’s fiduciary duty: Congress and the administration have pounded the financial industry about its obligation to protect the integrity of the markets and the financial system as a whole. What is the government’s own post-bailout fiduciary duty as a major shareholder of some of America’s largest companies? Treasury issued a press release stating, “GM Repays Treasury Loan in Full” and that this was a “positive step,” while fully aware that the loan was paid from TARP funds escrowed for the purpose of paying the loan. Legally accurate, perhaps, but certainly misleading. GMAC Financial Services, 56 percent of which is owned by Treasury, took $3.8 billion in TARP aid in December 2009, but announced a quarterly profit of $162 million Monday, on “higher income earned from the loans it extended relative to its borrowing costs, gains stemming from asset sales and lower loss reserves.” No clarification has come from Treasury on what that all means. The department is awaiting initial public offerings from GM and GMAC to sell off its shares, and the government is already selling of shares of banks stocks it took in exchange for TARP funds. Is the government obliged to the markets and to buyers to make full disclosure of everything it knows? Can the government use its resources to announce good news, but stay quiet on negative developments? Does the government have the fiduciary duty to determine and look out for the “best interests” that the Senate is considering for financial services companies? Or does the government have a higher duty? The answers are unclear, but certainly relevant to buyers today and in the future.

Will Congress reinstate limits on corporate political contributions? Earlier this year, the Supreme Court in Citizens United v. FEC held that corporate funding of independent political broadcasts in candidate elections cannot be limited under the First Amendment. House Democrats are wasting no time with their plans to move legislation to limit the effects of the Supreme Court decision that allows corporations to spend freely on political campaigns. The proposed legislation, H.R. 5175, the DISCLOSE Act, would require senior executives to actively approve ads and disclose any major donors to “campaign-related activity.” President Obama has issued a statement supporting the bill. According to the Washington Post, Democrats fear the decision will unleash a flood of corporate spending in the fall midterm elections that is likely to favor Republicans. The House Administration Committee will hold hearings and House Democratic leaders want the legislation can take effect in time for the 2010 elections. The bill may pass the House, but Senate Republicans and major trade groups such as the U.S. Chamber of Commerce have said they would oppose the bill.

Financial reform and “wise fathers:” As the Senate begins debate on the far-reaching financial reform bill, there are several good resources to help understand where things are and where things may go from here. The Wall Street Journal offers a side-by-side comparison of the Senate and House bills, the Hill details the plethora of amendments that are expected and the White House communications director offers his “top 10 most wanted lobbyist loopholes.” The Washington Post adds that financial industry lobbyists may be hoping, “to get this thing off the [Senate] floor and into a reasonable, behind-the-scenes” discussion.

Prescription for Congress — first do no harm: With all this action swirling, some critics worry that the bill may be too much, too fast. Unexpectedly, more than 20 of the country’s largest health-care associations are voicing concern that that they would fall under the present bill. The bill now extends to persons “engaged significantly in offering or providing consumer financial products or services” and dentists and other medical service providers that allow installment payments and may change interest are afraid they will be included under the bill. The statutory language is “very confusing,” and, “The assertion that dentists are covered by it is more than likely,” says the American Dental Association. People scoffed when Senator Ben Nelson, Nebraska Democrat, said he voted against debate to protect dentists, but he may have been on to something.